Measure would change tax rate for some vacation rentals

Non-primary homes would be switched from commercial to hotel classification

Melissa Tanji

Staff Writer

mtanji@mauinews.com

WAILUKU — Based on current rates, a nearly 29 percent property tax hike could be in store for homeowners who rent out their non-primary residences as transient vacation rentals.

A bill under consideration by the Maui County Council’s Budget and Finance Committee also would apply to property owners who rent out non-primary residences under a conditional permit allowing short-term vacation rental use.

The measure would reclassify rental properties from commercial (now taxed at $7.28 per $1,000 of net taxable assessed valuation) to the hotel and resort classification (now taxed at $9.37 per $1,000). The council sets property tax rates every budget year.

The bill would not affect property owners who use their primary residences for a permitted bed-and-breakfast or transient vacation rental. These properties would remain under the commercial residential tax category.

Scott Teruya, the county’s Real Property Tax Division administrator, said the change would net the county $640,000 in additional revenue. There would be 186 units affected by the change, Teruya told the committee.

A reason for the change is “having similar uses being taxed in the same tax classification,” Teruya said.

In countering some opposition to the bill, Teruya pointed out that testifiers noted that their short-term rentals are not like hotels, so they should not be taxed under that category. But he questioned how the short-term rentals and transient vacation rentals are like a McDonald’s.

“From a land-use standpoint, that’s what commercial is,” Teruya said.

Teruya and committee Chairman Riki Hokama noted that prior to a change in 2014, non-primary residences used as vacation rentals were in the hotel and resort property tax category.

Teruya said property owners may be chasing a lower tax rate rather than an appropriate tax classification. He asked what would happen if the commercial tax rate spiked.

The current measure would help clarify and clean up the tax code and its inconsistencies, he said.

Council Member Don Guzman stressed that the short-term and vacation rentals are not the same as hotels and resorts, which have the ability to build more on their properties and have businesses on their properties.

He said the change seemed unfair.

Hokama agreed that there would be issues with the bill, and “there is not one silver bullet to solve this.”

But he said this is another chance to take a look at land use and taxation.

Lawrence Carnicelli, who handles government affairs for the Realtors Association of Maui, said the short-term rentals and transient vacation rentals in non-primary residences do not have the same developmental and business opportunities as hotels. These include having parties on weekends and special amenities, including water parks.

Members of the Maui County Council testified before the state Legislature recently not to raise the state hotel room tax because it would harm tourism, he said.

“And yet this is what we are doing now. We want to raise taxes on the tourist industry,” Carnicelli said.

He said that some international travelers have been staying at places such as short-term rentals and transient vacation rentals for years and the trend has caught on with other visitors.

Thomas Croly of the Maui Vacation Rental Association also testified against the bill.

In oral and written testimony, Croly said the issues surrounding this bill were ironed out in 2014 when the short-term rental home permit holders were placed into the commercial category if they conducted the rentals on non-primary residences.

In his written testimony, Croly referred to a council committee report in 2014 that said having the short-term rental home permit holders pay the hotel/resort tax rate would negatively impact the legal operators who abide by the law, compared with illegal operators who operate with no permits and are taxed at the lower-rate property tax category.